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Plans to allow UK pensioners to switch annuity contracts, set out by the pensions minister Steve Webb over the weekend, could end up swelling investment bankers' bonuses rather than boosting retirees' incomes, according to industry experts.

Webb told the Sunday Telegraph that he wants people who buy private-sector pensions, known as annuity contracts, from insurance companies to be able to switch providers if it turns out they get a poor deal.

The plan would affect workers saving into "defined contribution" pension schemes, which pay out a pot of money upon retirement. The vast majority of workers use this to purchase an annuity from an insurer such as Legal & General or Scottish Widows, which pays an annual income for life.

In comments confirmed by the Department for Work and Pensions this morning, Webb told the newspaper: "When you take out a mortgage, in a few years if rates change you can switch your mortgage. But when you take out an annuity, that’s it – for life. This could easily be for a quarter of a century.

"Why shouldn’t you be able to change your annuity provider so a few years later somebody else could offer you a bigger pension? Why shouldn’t you be able to shop around?"

According to industry experts contacted by Financial News this morning, the creation of a new market in post-retirement annuity switching would generate appetite among insurers for new financial hedging products. The main sellers of these would be banks.

Adrian Boulding, head of pensions strategy at Legal & General, said that insurers would need to buy interest-rate put options to protect themselves against rising rates, because rising rates could mean insurers' bond portfolios fall in value at the same time that consumers want to switch contracts.

He said: "You could imagine a vast amount of switching taking place based on the fact that interest rates change. That's a good thing as far as the consumer is concerned. But that also affects the economics for the insurer."

Boulding added: "The beneficiaries of such a process would probably be investment bankers. Those are the people that sell interest-rate options. Perversely, the situation might end up with lower pensions and higher bankers' bonuses."

He explained: "When someone takes out a 25-30 year annuity under the current system, we invest that money in 25-30 year bonds. If long-term interest rates increase, the capital value of the bonds will fall.

"If we are then asked to give the consumer back their original money [the money used to buy the annuity], we would have to be able to sell the bonds for the price that we paid for them. To do that, we would have to buy interest-rate put options when the annuity is first taken out. But these carry a steep cost, which would have to be priced into the starting value of the annuity."

According to Boulding's calculations, that could mean the pensions on offer from the new "Webb annuities" could be up to 25% lower.

Alan Higham, chief executive of Retirement Angels, an annuity consultancy concurred: "That seems like a reasonable estimate to me - and I don't think this switching option is worth reducing people's income by that much."

Whether that situation arises will depend on further detail from the Department for Work and Pensions. This morning, a spokesman said Webb had been "setting out his current thinking" in his interview rather than unveiling detailed policy proposals, which may be forthcoming following further discussions within government.